Agilysys, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Table amounts in thousands, except per share data)
1. Nature of Operations
Agilysys has been a leader in hospitality software for more than 40 years, delivering innovative guest-centric technology solutions for gaming, hotels, resorts and cruise, corporate foodservice management, restaurants, universities, stadia, airport foodservice and healthcare. Agilysys offers the most comprehensive solutions in the industry, including point of sale (POS), property management systems (PMS), inventory and procurement, payments, and related applications, to manage the entire guest journey.
The Company has just one reportable segment serving the global hospitality industry. Agilysys operates across North America, Europe, Asia-Pacific, and India with headquarters located in Alpharetta, GA.
Reference herein to any particular year or quarter refers to periods within the fiscal year ended March 31. For example, fiscal 2020 refers to the fiscal year ended March 31, 2020.
COVID-19 Pandemic
During the fourth quarter ended March 31, 2020, concerns related to the spread of novel coronavirus (“COVID-19”) began to create global business disruptions as well as disruptions in our operations and cause potential negative impacts on our revenues and other financial results. COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The extent to which COVID-19 will impact our financial condition or results of operations is currently uncertain and depends on various factors, including the impact on our customers, partners, and vendors and on the operation of the global markets in general. Because an increasing portion of our business is based on a subscription model, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. The COVID-19 pandemic had a significant impact on our business as of March 31, 2020, and the twelve month period then ended. As a result, we recorded impairments of our capitalized software development costs and certain internal use software as of the balance sheet date due to triggering events identified as of year-end. We also increased our allowance for doubtful accounts and our customer credit allowance due to the direct negative impact on our customers as of year-end.
2. Summary of Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the accounts of Agilysys, Inc. and subsidiaries. Investments in affiliated companies are accounted for by the equity or cost method, as appropriate. All inter-company accounts have been eliminated.
Use of estimates. Preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates. In particular, the economic disruption related to the COVID-19 pandemic had a material adverse impact on our results for the year ended March 31, 2020, and we expect it to continue to have a material adverse impact on our results. As such, this annual period, as well as upcoming interim periods, are unlikely to be comparable to past performance or indicative of future performance.
Cash and cash equivalents. We consider all highly liquid investments purchased with an original maturity from date of acquisition of three months or less to be cash equivalents. Other highly liquid investments considered cash equivalents with no established maturity date are fully redeemable on demand (without penalty) with settlement of principal and accrued interest on the following business day after instruction to redeem. Such investments are readily convertible to cash with no penalty and can include certificates of deposit, commercial paper, treasury bills, money market funds and other investments.
Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as historic trends of the entire customer pool. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. To mitigate this credit risk we perform periodic credit evaluations of our customers.
Customer credit allowance. We maintain allowances for estimated customer credits. Credits are typically due to the timing or amount of customer invoices processed for specific services, including professional and subscription, and maintenance coverage. In many cases, there has not been clear or timely communication of the need to adjust coverage or service at a location in advance of when we
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invoice for the associated coverage or service. We will issue a credit after agreeing to the service or coverage adjustment as requested by the customer within the terms of our contract.
Inventories. Our inventories are comprised of finished goods. Inventories are stated at the lower of cost or net realizable value, net of related reserves. The cost of inventory is computed using a weighted-average method. Our inventory is monitored to ensure appropriate valuation. Adjustments of inventories to the lower of cost or net realizable value, if necessary, are based upon contractual provisions such as turnover and assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by management, additional adjustments to inventory valuations may be required. We provide a reserve for obsolescence, which is calculated based on several factors, including an analysis of historical sales of products and the age of the inventory. Actual amounts could be different from those estimated.
Leases. We determine if an arrangement is or contains a lease at inception. Operating leases are presented as Right-of-Use (“ROU”) assets and the corresponding lease liabilities are included in operating lease liabilities – current and operating lease liabilities – non-current on our Consolidated Balance Sheet. Finance leases are included in property and equipment, net and corresponding liabilities are included in finance lease obligations – current and non-current on our Consolidated Balance Sheet. ROU assets represent our right to use the underlying asset, and lease liabilities represent our obligation for lease payments in exchange for the ability to use the asset for the duration of the lease term.
ROU assets and lease liabilities are recognized at commencement date and determined using the present value of the remaining lease payments over the lease term. We use an incremental borrowing rate based on estimated rate of interest for collateralized borrowing since our leases do not include an implicit interest rate. The estimated incremental borrowing rate considers market data, actual lease economic environment, and actual lease term at commencement date. The lease term may include options to extend when it is reasonably certain that we will exercise that option. ROU assets include lease payments made in advance, and excludes any incentives received or initial direct costs incurred. Lease expense is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components which we account for as a single lease component. We also have leases which include variable lease payments, which are expensed as incurred. Our variable lease payments are not based on an index or rate and therefore are excluded from the calculation of lease liabilities. We have elected to not recognize short term leases that have a term of twelve months or less as ROU assets or lease liabilities. Our short-term leases are not material and do not have a material impact on our ROU assets or lease liabilities. Additionally, we do not have any covenants, residual value guarantees, or related party transactions associated with our lease agreements.
Goodwill and Other Indefinite-Lived Intangible Assets. Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. The carrying amount of goodwill was $19.6 million as of March 31, 2020 and 2019. Goodwill is tested for impairment on an annual basis, or in interim periods if indicators of potential impairment exist. The Company evaluates whether goodwill is impaired by comparing its market capitalization based on its closing stock price (Level 1 input) to the book value of its equity on the annual evaluation date. Based on testing performed, the Company concluded that no impairment of its goodwill has occurred for the years ended March 31, 2020, 2019 and 2018.
The Company is also required to compare the fair values of other indefinite-lived intangible assets to their carrying amounts at least annually, or when current events and circumstances require an interim assessment. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized.
Intangible assets. Purchased intangible assets with finite lives are primarily amortized using the straight-line method over the estimated economic lives of the assets. Our finite-lived intangible assets are amortized over periods between two and eight years. Customer relationships are amortized over estimated useful lives between two and seven years; non-competition agreements are amortized over estimated useful lives between two and eight years; developed technology is amortized over estimated useful lives between three and eight years; supplier relationships are amortized over estimated useful lives between two and eight years.
Long-lived assets. Property and equipment are recorded at cost. Major renewals and improvements are capitalized. Minor replacements, maintenance, repairs, and reengineering costs are expensed as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized.
Depreciation and amortization are provided in amounts sufficient to amortize the cost of the assets, including assets recorded under finance leases, which make up less than one percent of total assets, over their estimated useful lives using the straight-line method. The estimated useful lives for depreciation and amortization are as follows: buildings and building improvements - 7 to 30 years; furniture - 7 to 10 years; equipment - 3 to 10 years; software - 3 to 10 years; and leasehold improvements over the shorter of the economic life or the lease term. Internal use software costs are expensed or capitalized depending on the project stage. Amounts capitalized are amortized over the estimated useful lives of the software, ranging from 3 to 10 years, beginning with the project's completion. Depreciation for capitalized project expenditures does not begin until the underlying project is completed.
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We evaluate the recoverability of our long-lived assets whenever changes in circumstances or events may indicate that the carrying amounts may not be recoverable. An impairment loss is recognized in the event the carrying value of the assets exceeds the future undiscounted cash flows attributable to such assets. Our long-lived assets and impairments considerations are discussed further in Note 4, Property and Equipment, net.
Foreign currency translation. The financial statements of our foreign operations are translated into U.S. dollars for financial reporting purposes. The assets and liabilities of foreign operations whose functional currencies are not in U.S. dollars are translated at the period-end exchange rates, while revenue and expenses are translated at weighted-average exchange rates during the fiscal year. The cumulative translation effects are reflected as a component of “Accumulated other comprehensive loss” within shareholders' equity in the Consolidated Balance Sheets. Gains and losses on monetary transactions denominated in other than the functional currency of an operation are reflected within “Other (income) expenses, net” in the Consolidated Statements of Operations. Foreign currency gains and losses from changes in exchange rates have not been material to our consolidated operating results.
Revenue recognition. We derive revenue from the sale of products (i.e., software, third party hardware and operating systems), support, maintenance and subscription services and professional services. For the fiscal years 2020, 2019 and 2018, revenue from international operations was 9%, 9% and 8%, respectively of total revenue. Our customer base is highly fragmented.
On April 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts that were not completed as of the adoption date. Results for reporting periods beginning after the adoption date are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under prior guidance.
Revenue recognition under Topic 606
Our customary business practice is to enter into legally enforceable written contracts with our customers. The majority of our contracts are governed by a master service agreement between us and the customer, which sets forth the general terms and conditions of any individual contract between the parties, which is then supplemented by a customer order to specify the different goods and services, the associated prices, and any additional terms for an individual contract. Performance obligations specific to each individual contract are defined within the terms of each order. Each performance obligation is identified based on the goods and services that will be transferred to our customer that are both capable of being distinct and are distinct within the context of the contract. The transaction price is determined based on the consideration to which we will be entitled and expect to receive in exchange for transferring goods or services to the customer. Typically, our contracts do not provide our customer with any right of return or refund; we do not constrain the contract price as it is probable that there will not be a significant revenue reversal due to a return or refund.
Typically, our customer contracts contain one or more of the following goods or services which constitute performance obligations.
Our software licenses typically provide for a perpetual right to use our software. Generally, our contracts do not provide significant services of integration and customization and installation services are not required to be purchased directly from us. The software is delivered before related services are provided and is functional without professional services, updates and technical support. We have concluded that the software license is distinct as the customer can benefit from the software on its own. Software revenue is typically recognized when the software is delivered or made available for download to the customer.
Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer's final acceptance of the arrangement have been fulfilled. Hardware is purchased from suppliers and provided to the end-user customers via drop-ship or from inventory. We are responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we ship or are notified by the supplier that the product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of destination or upon installation at the customer site.
Support and maintenance revenue is derived from providing telephone and on-line technical support services, bug fixes, and unspecified software updates and upgrades to customers on a when-and-if-available basis. These services represent a stand-ready obligation that is concurrently delivered and has the same pattern of transfer to the customer; we account for these support and maintenance services as a single performance obligation recognized over the term of the maintenance agreement.
Our subscription service revenue is comprised of fees for contracts that provide customers a right to access our software for a subscribed period. We do not provide the customer the contractual right to license the software at any time outside of the subscription period under these contracts. The customer can only benefit from the software and software maintenance when provided the right to access the software. Accordingly, each of the rights to access the software, the maintenance services, and any hosting services is not considered a distinct performance obligation in the context of the contract and should be combined into a single performance
47
obligation to be recognized over the contract period. The Company recognizes subscription revenue over a one-month period based on the typical monthly invoicing and renewal cycle in accordance with our customer agreement terms.
Professional services revenues primarily consist of fees for consulting, installation, integration and training and are generally recognized over time as the customer simultaneously receives and consumes the benefits of the professional services as the services are being performed. Professional services can be provided by internal or external providers, do not significantly affect the customer's ability to access or use other provided goods or services, and provide a measure of benefit beyond that of other promised goods or services in the contract. As a result, professional services are considered distinct in the context of the contract and represent a separate performance obligation. Professional services that are billed on a time and materials basis are recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time using an input method based on labor hours expended to date relative to the total labor hours expected to be required to satisfy the related performance obligation.
We use the market approach to derive standalone selling price ("SSP") by maximizing observable data points (in the form of recently executed customer contracts) to determine the price customers are willing to pay for the goods and services transferred. If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative SSP basis.
Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold. Revenue is recorded net of any applicable taxes collected and remitted to governmental agencies.
Comprehensive (loss) income. Comprehensive (loss) income is the total of net (loss) income, as currently reported under GAAP, plus other comprehensive (loss) income. Other comprehensive (loss) income considers the effects of additional transactions and economic events that are not required to be recorded in determining net (loss) income, but rather are reported as a separate statement of comprehensive (loss) income.
Fair value measurements. We measure the fair value of financial assets and liabilities on a recurring or non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. In determining fair value of financial assets and liabilities, we use various valuation techniques. Additional information regarding fair value measurements is provided in Note 14, Fair Value Measurements.
Investments in corporate-owned life insurance policies. Agilysys invests in corporate-owned life insurance policies, for which some are endorsement split-dollar life insurance arrangements. We entered into agreements with certain former executives, whereby we must maintain the life insurance policy for a specified amount and split a portion of the policy benefits with their respective designated beneficiary. Our investment in these corporate-owned life insurance policies were recorded at their cash surrender value, which approximates fair value at the balance sheet date. In the Consolidated Balance Sheets at the balance sheet date, the cash surrender value of $0.9 million for the remaining policies were held in “Other non-current assets,” and the present value of future proceeds owed to those executives' designated beneficiary of $0.1 million, which approximates fair value, were recorded within "Other non-current liabilities." Additional information regarding the investments in corporate-owned life insurance policies is provided in Note 10, Employee Benefit Plans.
Income Taxes. Income tax expense includes U.S. and foreign income taxes and is based on reported income before income taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are anticipated to be settled or realized.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.
We recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from uncertain tax positions are measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet this threshold. Interest related to uncertain tax positions is recognized as part of the provision for income taxes and is accrued beginning in the period that such interest would be applicable under relevant tax law until such time that the related tax benefits are recognized. Our income taxes are described further in Note 9, Income Taxes.
Capitalized Software Development Costs. The capitalization of software development cost for external use begins when a product’s technological feasibility has been established. Capitalization ends when the resulting product is available for general market release. Amortization of the capitalized software is classified within products cost of goods sold in the Consolidated Statements of Operations. For each capitalized software product, the annual amortization is equal to the greater of: (i) the amount computed using the ratio that
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the software product’s current fiscal year gross revenue bears to the total current fiscal year and anticipated future gross revenues for that product or (ii) the amount computed based on straight-line method over the remaining estimated economic life of the product, which is a range between three and eight years. Annually, or more frequent as required by triggering events, an analysis of the net realizable value of the capitalized software is completed and the amount by which unamortized software costs exceeds the net realizable value, if any, is recognized as a charge to income in the period it is determined. See further discussion regarding our capitalized software development costs in Note 5, Intangible Assets and Software Development Costs.
Advertising and Promotion Expense. We expense advertising and promotion expense as incurred. Advertising and promotion expense was $2.7 million, $2.0 million and $2.7 million in fiscal 2020, 2019 and 2018, respectively.
Reclassification. Certain prior year balances have been reclassed to conform to the current year presentation. Specifically, we reclassed certain employee benefit obligations from current to non-current liabilities.
Adopted and Recently Issued Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-03, Codification Improvements to Financial Instruments. ASU 2020-03 provides clarifications for questions and comments received regarding how changes to specific guidance related to financial instruments as a result of ASU No. 2016-13 interacts with other areas of the codification. The guidance was effective upon issuance of the ASU and correlates to the adoption of each of the applicable ASUs. Consistent with the documentation below, we are still assessing the impact of the adoption of ASU 2016-13 and will apply applicable changes from ASU 2020-03 in the period of adoption.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions previously allowed in the standard and simplifies the accounting for income taxes by providing additional guidance for certain tax situations. The update is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 provides corrections, updates and clarifications to the previously issued updates ASU 2016-13, ASU 2017-12 and ASU 2016-01. Various areas of the codification were impacted from the update. The standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. Consistent with the documentation below, we are still assessing the impact of the adoption of ASU 2016-13, and the other two ASUs affected by ASU 2019-04 are not applicable to us. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 addresses the treatment of implementation costs incurred in a hosting arrangement that is a service contract. The update does not impact the accounting for the service element of a hosting arrangement that is a service contract. The update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption (including early adoption in any interim period) permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 addresses the required disclosures around fair value measurement. The disclosure requirements of the reasons for transfers between Level 1 and Level 2, the policy for timing transfers between levels, and the valuation process for Level 3 measurements have been removed. Certain modifications were made to required disclosures and additional requirements were established. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). ASU 2018-02 addresses the effect of the change in the U.S. federal corporate tax rate on items within accumulated other comprehensive income or loss due to the enactment of the Tax Act on December 22, 2017. The new standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We have adopted this standard as of April 1, 2019. While we have elected to reclassify any amount out of other comprehensive income, we do not have any amounts to reclassify and therefore the adoption had no impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 eliminates Step 2 of the goodwill impairment test and requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of its goodwill. The ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. While we are
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still assessing the impact of this standard, we do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). This new standard changes the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. The new standard is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. We are currently reviewing this standard to assess the impact on our future consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for leases with lease terms of more than 12 months. Unlike Accounting Standard Codification Topic 840 (“Topic 840”), which requires only capital leases to be recognized on the balance sheet, the new guidance requires both types of leases to be recognized on the balance sheet. The most prominent change for lessees is the requirement to recognize both Right-of-Use (ROU) assets and lease liabilities for leases classified as operating leases under Topic 840. We adopted Topic 842 as of April 1, 2019 using the current period adjustment method of adoption. Refer to Note 6, Leases for further details.
Management continually evaluates the potential impact, if any, of all recent accounting pronouncements on our consolidated financial statements or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.
3. Revenue Recognition
On April 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts that were not completed as of the adoption date. Results for reporting periods beginning after the adoption date are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under prior guidance. For in depth discussion regarding our revenue recognition procedures for our revenue streams, see Note 2, Summary of Significant Accounting Policies.
Disaggregation of Revenue
We derive and report our revenue from the sale of products (software licenses, third party hardware and operating systems), support, maintenance and subscription services and professional services. Revenue recognized at a point in time (products) totaled $44.2 million, $39.0 million, and $33.7 million during fiscal 2020, 2019 and 2018. Revenue recognized over time (support, maintenance and subscription services and professional services) totaled $116.5 million, $101.8 million, and $93.7 million during fiscal 2020, 2019 and 2018.
Contract Balances
Contract assets are rights to consideration in exchange for goods or services that we have transferred to a customer when that right is conditional on something other than the passage of time. The majority of our contract assets represent unbilled amounts related to professional services. We expect billing and collection of our contract assets to occur within the next twelve months. We receive payments from customers based upon contractual billing schedules and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities represent consideration received or consideration which is unconditionally due from customers prior to transferring goods or services to the customer under the terms of the contract.
Revenue recognized from amounts included in contract liabilities at the beginning of the period was $37.0 million and $33.1 million during fiscal 2020 and 2019. During fiscal 2020 and 2019, we transferred from contract assets at the beginning of the period, $2.8 million and $4.6 million, respectively, to accounts receivable because the right to the transaction became unconditional.
Our arrangements are for a period of one year or less. As a result, unsatisfied performance obligations as of March 31, 2020 are expected to be satisfied and the allocated transaction price recognized in revenue within a period of 12 months or less.
Assets Recognized from Costs to Obtain a Contract
Sales commission expenses that would not have occurred absent the customer contracts are considered incremental costs to obtain a contract. We have elected to take the practical expedient available to expense the incremental costs to obtain a contract as incurred when the expected benefit and amortization period is one year or less. For subscription contracts that are renewed monthly based on an agreement term, we capitalize commission expenses and amortize as we satisfy the underlying performance obligations, generally based on the contract terms and anticipated renewals. For first year support and maintenance service contracts, commission expenses
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are immaterial and therefore expenses as incurred. Other sales commission expenses are not material or have a period of benefit of one year or less, and are therefore expensed as incurred in line with the practical expedient elected.
As part of our 606 transition adjustments, we capitalized $1.9 million of sales incentive costs incurred in prior periods as of April 1, 2018. We had $3.2 million and $3.3 million of capitalized sales incentive costs as of March 31, 2020 and 2019, respectively. These balances are included in other non-current assets on our Consolidated Balance Sheet. During fiscal 2020 and 2019, we expensed $4.7 million and $4.5 million, respectively, of sales commission, which included amortization of capitalized amounts of $1.4 million and $1.1 million, respectively. These expenses are included in operating expenses – sales and marketing in our Consolidated Statement of Operations. All other costs to obtain a contract are not considered incremental and therefore are expensed as incurred.
Financial Statement Impact of Adoption on Previously Reported Results
We adopted Topic 606 using the modified retrospective method beginning fiscal 2019. The cumulative impact of applying the new guidance to all contracts with customers that were not completed as of April 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new standard, we also impacted accounts receivable, net, contract assets, prepaid expenses and other current assets, other non-current assets, contract liabilities and retained earnings on our Consolidated Balance Sheet as of April 1, 2018.
The acceleration of revenue that was deferred under prior guidance as of the adoption date was primarily attributable to the requirement of Topic 606 to allocate the transaction price to the performance obligations in the contract on a relative basis using SSP rather than allocating under the residual method, which allocates the entire arrangement discount to the delivered performance obligations.
Due to the Company's full valuation allowance as of the adoption date, there was no tax impact associated with the adoption of Topic 606.
We made certain presentation changes to our Consolidated Balance Sheet on April 1, 2018 to comply with Topic 606. Prior to adoption of the new standard, we offset accounts receivable and contract liabilities (previously presented as deferred revenue on our Consolidated Balance Sheet) for unpaid deferred performance obligations included in contract liabilities. Under the new standard, we record accounts receivable and related contract liabilities for non-cancelable contracts with customers when the right to consideration is unconditional. Upon adoption, the right to consideration in exchange for goods or services that have been transferred to a customer when that right is conditional on something other than the passage of time were reclassified from accounts receivable to contract assets.
4. Property and Equipment, Net
Property and equipment at March 31, 2020 and 2019 is as follows:
|
|
|
Year ended March 31,
|
|
|
(In thousands)
|
|
|
2020
|
|
|
|
2019
|
|
|
Furniture and equipment
|
|
$
|
14,358
|
|
|
$
|
11,604
|
|
|
Software
|
|
|
17,136
|
|
|
|
16,427
|
|
|
Leasehold improvements
|
|
|
7,012
|
|
|
|
6,981
|
|
|
Project expenditures not yet in use
|
|
|
50
|
|
|
|
1,014
|
|
|
|
|
|
38,556
|
|
|
|
36,026
|
|
|
Accumulated depreciation and amortization
|
|
|
(24,592
|
)
|
|
|
(20,188
|
)
|
|
Impairments
|
|
|
(1,734
|
)
|
|
|
—
|
|
|
Property and equipment, net
|
|
$
|
12,230
|
|
|
$
|
15,838
|
|
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Total depreciation expense on property and equipment was $2.6 million, $2.5 million, and $2.6 million during fiscal 2020, 2019 and 2018, respectively.
The Company capitalizes internal-use software, including software used exclusively in providing services or that is only made available to customers as a software service, as property and equipment under ASC 350-40, Internal-Use Software. Total amortization expense on capitalized internal-use software was $2.5 million, $2.5 million and $1.8 million during fiscal 2020, 2019, and 2018, respectively. The global economic impact of the COVID-19 pandemic triggered management to review property and equipment held by the Company for indicators of impairment. The carrying value of our capitalized costs for internal-use software related to our rGuest Seat solution did not exceed the estimated undiscounted cash flows, and utilizing a market approach, was determined to be fully impaired, resulting in $1.7 million of asset impairment charges in the Consolidated Statement of Operations during the fiscal year ended March 31, 2020.
Assets under financing leases are included in property and equipment categories above and further disclosed with Note 6. Leases.
5. Intangible Assets and Software Development Costs
The following table summarizes our intangible assets and software development costs at March 31, 2020, and 2019:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
(In thousands)
|
|
amount
|
|
|
amortization
|
|
|
Impairment
|
|
|
amount
|
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
10,775
|
|
|
$
|
(10,775
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,775
|
|
|
$
|
(10,775
|
)
|
|
$
|
-
|
|
|
Non-competition agreements
|
|
|
2,700
|
|
|
|
(2,700
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,700
|
|
|
|
(2,700
|
)
|
|
|
—
|
|
|
Developed technology
|
|
|
10,398
|
|
|
|
(10,398
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
10,398
|
|
|
|
(10,398
|
)
|
|
|
—
|
|
|
Trade names
|
|
|
230
|
|
|
|
(230
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
230
|
|
|
|
(192
|
)
|
|
|
38
|
|
|
Patented technology
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
|
|
24,183
|
|
|
|
(24,183
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
24,183
|
|
|
|
(24,145
|
)
|
|
|
38
|
|
|
Trade names
|
|
|
8,400
|
|
|
N/A
|
|
|
|
—
|
|
|
|
8,400
|
|
|
|
8,400
|
|
|
N/A
|
|
|
|
8,400
|
|
|
Total intangible assets
|
|
$
|
32,583
|
|
|
$
|
(24,183
|
)
|
|
$
|
-
|
|
|
$
|
8,400
|
|
|
$
|
32,583
|
|
|
$
|
(24,145
|
)
|
|
$
|
8,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development costs
|
|
$
|
67,541
|
|
|
$
|
(45,535
|
)
|
|
$
|
(22,006
|
)
|
|
$
|
-
|
|
|
$
|
67,541
|
|
|
$
|
(32,974
|
)
|
|
$
|
34,567
|
|
Indefinite-lived intangible assets, comprised of our purchased trade name InfoGenesis™ as of March 31, 2020 and 2019 are tested for impairment upon identification of impairment indicators or at least annually. An impairment loss is recognized if the carrying amount is greater than fair value. The InfoGenesis™ indefinite-lived purchased trade name impairment testing resulted in a fair value exceeding the carrying amount for the years ending March 31, 2020, 2019 and 2018.
Management compares the unamortized capitalized software development costs for each external use product to its net realizable value by analyzing critical inputs such as costs necessary to bring the software to market, costs necessary to maintain the software, life of the software, and market capacity. As of March 31, 2020, management determined the net realizable value of the remaining capitalized software development costs for certain solutions within out rGuest suite of products no longer exceeded their carrying value, and as a result, recorded non-cash impairment charges of $22.0 million. The impact of the COVID-19 pandemic on the hospitality industry resulted in economic conditions which make it difficult to project future sales and revenue accurately for the related rGuest solutions. After evaluating the Company’s strategy for market development and continued costs to support the software, an impairment charge was required. The amount of impairment recognized during the period reduced the carry value of capitalized software development costs to zero with no remaining amortization expense to be recognized in future periods.
Amortization expense related to software development costs related to assets to be sold, leased, or otherwise marketed was $12.6 million, $12.6 million and $10.0 million for the fiscal years ended March 31, 2020, 2019 and 2018, respectively. These charges are included as Products cost of goods sold within the Consolidated Statements of Operations. Amortization expense relating to other definite-lived intangible assets was $38,000 for the fiscal year end March 31, 2020 and $46,000 for the fiscal years ended March 31, 2019 and 2018. These charges are classified as operating expenses within the Consolidated Statements of Operations.
Capitalized software development costs are carried on our balance sheets at net realizable value, net of accumulated amortization. We did not capitalize any software development costs during fiscal 2020. We capitalized approximately $2.0 million and $8.2 million during fiscal 2019 and 2018, respectively.
52
6. Leases
We adopted Topic 842 on April 1, 2019 using the current period adjustment method of adoption to recognize leases with a duration greater than 12 months on the balance sheet. The impact of adoption on April 1, 2019 was recognition of operating lease liabilities of $16.3 million and related Right-of-Use (“ROU”) assets of $13.8 million. Prior period financial statements have not been restated and therefore the comparative amounts are not presented below or on the Consolidated Balance Sheets as of March 31, 2019. For operating leases with a term greater than 12 months, we have recorded the lease liability at the present value of lease payments over the remaining lease term and the related ROU asset. The remaining lease term has been determined for each lease considering factors such as renewal options, termination options, our Company’s historical practices in exercising such options, and current business knowledge which may impact lease related decisions. The majority of our leases are comprised of real estate leases for our respective offices around the globe. Our finance leases consist of office equipment. We have no residual value guarantees or restrictions or covenants imposed by, or associated with our active leases. Since our current leases do not provide an implicit rate of return, our incremental borrowing rates used to determine the value of lease payments in implementation are estimated as of April 1, 2019, based on collateralized rates for a term similar to each remaining lease term.
We have elected the package of practical expedients permitted under the transition guidance which includes the ability to carryforward the previously determined lease classification (operating or finance), forgo the assessment whether active contracts contain a lease, and whether capitalized costs associated with a lease meet the definition of “initial direct costs” as defined within Topic 842. In the event that any of our leases contain nonlease components, we have elected the practical expedient to account for each separate lease component and the associated nonlease component(s) as a single lease component. We have also elected the accounting policy to forgo applying the guidance of Topic 842 to short term leases (defined as a term of 12 months or less, without a purchase option which we are reasonably certain to exercise).
As of March 31, 2020, we do not have any leases which have not yet commenced. We do not have any related party leases or sublease arrangements. We have variable payments for expenses such as common area maintenance and taxes. We do not have variable payments that are based on an index or rate. As a result, we do not include variable payments in the calculation of the lease liability. Any variable costs are expensed as incurred.
The components of lease expenses for the fiscal 2020 period were as follows:
|
|
|
Year Ended
|
|
|
(in thousands)
|
March 31, 2020
|
|
|
Operating leases expense
|
|
$
|
4,193
|
|
|
Finance lease expense:
|
|
|
|
|
|
Amortization of ROU assets
|
|
|
23
|
|
|
Interest on lease liabilities
|
|
|
6
|
|
|
Total finance lease expense
|
|
|
29
|
|
|
Variable lease costs
|
|
|
271
|
|
|
Short term lease expense
|
|
|
88
|
|
|
Total lease expense
|
|
$
|
4,581
|
|
53
Other information related to leases for fiscal 2020 was as follows:
|
|
|
Year Ended
|
|
|
Supplemental cash flow information
|
|
March 31, 2020
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
(in thousands):
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
4,873
|
|
|
Operating cash flows for finance leases
|
|
|
8
|
|
|
Financing cash flows for finance leases
|
|
|
24
|
|
|
ROU assets obtained in exchange for lease obligations (in thousands):
|
|
|
|
|
|
Operating leases
|
|
$
|
2,734
|
|
|
Finance leases
|
|
|
17
|
|
|
Weighted average remaining lease terms
|
|
|
|
|
|
Operating leases
|
|
|
5.04
|
|
|
Finance leases
|
|
|
2.16
|
|
|
Weighted average discount rates
|
|
|
|
|
|
Operating leases
|
|
|
10.37
|
%
|
|
Finance leases
|
|
|
4.38
|
%
|
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable leases with terms of more than one year to the total lease liabilities recognized on the Consolidated Balance Sheet as of March 31, 2020:
|
Year ending (in thousands)
|
|
Operating leases
|
|
|
Finance leases
|
|
|
2021
|
|
$
|
4,927
|
|
|
$
|
29
|
|
|
2022
|
|
|
4,207
|
|
|
|
21
|
|
|
2023
|
|
|
2,855
|
|
|
|
5
|
|
|
2024
|
|
|
2,685
|
|
|
|
2
|
|
|
2025
|
|
|
2,083
|
|
|
|
—
|
|
|
Thereafter
|
|
|
3,901
|
|
|
|
—
|
|
|
Total undiscounted future minimum lease payments
|
|
|
20,658
|
|
|
|
57
|
|
|
Less: difference between undiscounted lease payments and discounted lease
liabilities
|
|
|
(5,322
|
)
|
|
|
(8
|
)
|
|
Total lease liabilities
|
|
$
|
15,336
|
|
|
$
|
49
|
|
As previously disclosed on our March 31, 2019 Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancelable leases as of March 31, 2019 were as follows:
|
Year ending (in thousands)
|
|
Operating leases
|
|
|
Finance leases
|
|
|
2020
|
|
$
|
4,143
|
|
|
$
|
27
|
|
|
2021
|
|
|
3,945
|
|
|
|
23
|
|
|
2022
|
|
|
3,166
|
|
|
|
15
|
|
|
2023
|
|
|
1,916
|
|
|
|
—
|
|
|
2024
|
|
|
1,770
|
|
|
|
—
|
|
|
Thereafter
|
|
|
4,497
|
|
|
|
—
|
|
|
Total lease payments
|
|
|
19,437
|
|
|
|
65
|
|
|
Less: Amounts representing interest
|
|
|
—
|
|
|
|
(8
|
)
|
|
Present value of lease liabilities
|
|
$
|
19,437
|
|
|
$
|
57
|
|
54
7. Supplemental Disclosures of Cash Flow Information
Additional information related to the Consolidated Statements of Cash Flows is as follows:
|
|
|
Year ended March 31,
|
|
|
(In thousands)
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Cash (receipts) for interest, net
|
|
$
|
(371
|
)
|
|
$
|
(329
|
)
|
|
$
|
(88
|
)
|
|
Cash payments (receipts) for income tax, net
|
|
|
694
|
|
|
|
409
|
|
|
|
(227
|
)
|
|
Acquisition of property and equipment under lease obligations
|
|
|
17
|
|
|
|
—
|
|
|
|
64
|
|
|
Accrued capital expenditures
|
|
|
187
|
|
|
|
56
|
|
|
|
83
|
|
|
Accrued capitalized software development costs
|
|
|
—
|
|
|
|
—
|
|
|
|
201
|
|
|
Leasehold improvements acquired under operating lease arrangement
|
|
|
—
|
|
|
|
62
|
|
|
|
95
|
|
8. Additional Balance Sheet Information
Additional information related to the Consolidated Balance Sheets is as follows:
|
(In thousands)
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and related benefits
|
|
$
|
6,945
|
|
|
$
|
12,443
|
|
|
Other taxes payable
|
|
|
1,649
|
|
|
|
1,041
|
|
|
Accrued legal settlements
|
|
|
—
|
|
|
|
15
|
|
|
Severance liabilities
|
|
|
32
|
|
|
|
46
|
|
|
Professional fees
|
|
|
50
|
|
|
|
67
|
|
|
Deferred rent
|
|
|
—
|
|
|
|
273
|
|
|
Other
|
|
|
357
|
|
|
|
521
|
|
|
Total
|
|
$
|
9,033
|
|
|
$
|
14,406
|
|
|
Other non-current liabilities:
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions
|
|
$
|
1,103
|
|
|
$
|
1,083
|
|
|
Deferred rent and asset retirement obligations
|
|
|
170
|
|
|
|
2,613
|
|
|
Employee benefit obligations
|
|
|
511
|
|
|
|
486
|
|
|
Other
|
|
|
76
|
|
|
|
76
|
|
|
Total
|
|
$
|
1,860
|
|
|
$
|
4,258
|
|
9. Income Taxes
For the year ended March 31, loss before income taxes consisted of the following:
|
(In thousands)
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
(Loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(36,373
|
)
|
|
$
|
(13,621
|
)
|
|
$
|
(11,926
|
)
|
|
Foreign
|
|
|
2,507
|
|
|
|
678
|
|
|
|
325
|
|
|
Total loss before income taxes
|
|
$
|
(33,866
|
)
|
|
$
|
(12,943
|
)
|
|
$
|
(11,601
|
)
|
For the year ended March 31, income tax expense (benefit) consisted of the following:
|
(In thousands)
|
|
|
2020
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
59
|
|
|
$
|
54
|
|
|
$
|
66
|
|
|
State and local
|
|
|
21
|
|
|
|
(383
|
)
|
|
|
(446
|
)
|
|
Foreign
|
|
|
463
|
|
|
|
514
|
|
|
|
73
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11
|
|
|
|
79
|
|
|
|
(2,985
|
)
|
|
State and local
|
|
|
7
|
|
|
|
277
|
|
|
|
41
|
|
|
Foreign
|
|
|
(360
|
)
|
|
|
(320
|
)
|
|
|
—
|
|
|
Total income tax expense (benefit)
|
|
$
|
201
|
|
|
$
|
221
|
|
|
$
|
(3,251
|
)
|
55
The following table presents the principal components of the difference between the effective tax rate to the U.S. federal statutory income tax rate for the years ended March 31:
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Income tax benefit at the US Federal statutory rate
|
|
$
|
(7,112
|
)
|
|
$
|
(2,718
|
)
|
|
$
|
(3,654
|
)
|
|
Benefit for state taxes
|
|
|
(856
|
)
|
|
|
(304
|
)
|
|
|
(642
|
)
|
|
Impact of foreign operations
|
|
|
(514
|
)
|
|
|
(310
|
)
|
|
|
38
|
|
|
Indefinite life assets
|
|
|
19
|
|
|
|
130
|
|
|
|
335
|
|
|
Change in valuation allowance
|
|
|
8,406
|
|
|
|
3,302
|
|
|
|
3,328
|
|
|
Change in liability for unrecognized tax benefits
|
|
|
22
|
|
|
|
(400
|
)
|
|
|
40
|
|
|
Impact of Tax Act, net
|
|
|
—
|
|
|
|
226
|
|
|
|
(3,287
|
)
|
|
Share-based compensation
|
|
|
(312
|
)
|
|
|
2
|
|
|
|
476
|
|
|
Global intangible low-taxed income
|
|
|
460
|
|
|
|
94
|
|
|
|
—
|
|
|
Other
|
|
|
88
|
|
|
|
199
|
|
|
|
115
|
|
|
Total income tax expense (benefit)
|
|
$
|
201
|
|
|
$
|
221
|
|
|
$
|
(3,251
|
)
|
We have elected to account for global intangible low-taxed income (GILTI) inclusions in the period in which they are incurred.
Our tax provision includes a provision for income taxes in certain foreign jurisdictions where subsidiaries are profitable, but only a minimal benefit is reflected related to U.S. and certain foreign tax losses due to the uncertainty of the ultimate realization of future benefits from these losses. The fiscal 2020 tax provision results primarily from foreign tax expense. The fiscal 2020 tax provision differs from the statutory rate primarily due to the recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, state taxes and other U.S. permanent book to tax differences.
The fiscal 2019 tax provision primarily results from foreign tax expense, the reversal of reserves for uncertain tax positions and the completion of our accounting for the Tax Act. The fiscal 2019 effective rate differs from the statutory rate primarily due to the impact of the Tax Act, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, certain foreign and state tax effects.
Deferred tax assets and liabilities as of March 31, are as follows:
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
3,059
|
|
|
$
|
3,944
|
|
|
Allowance for doubtful accounts
|
|
|
331
|
|
|
|
120
|
|
|
Inventory valuation reserve
|
|
|
—
|
|
|
|
41
|
|
|
Federal losses and credit carryforwards
|
|
|
47,218
|
|
|
|
44,811
|
|
|
Foreign losses and credit carryforwards
|
|
|
1,523
|
|
|
|
1,146
|
|
|
State losses and credit carryforwards
|
|
|
10,911
|
|
|
|
9,886
|
|
|
Deferred revenue
|
|
|
582
|
|
|
|
488
|
|
|
Property and equipment and software amortization
|
|
|
163
|
|
|
|
—
|
|
|
Operating lease liabilities
|
|
|
1,297
|
|
|
|
—
|
|
|
Goodwill and other intangible assets
|
|
|
4,914
|
|
|
|
—
|
|
|
Other
|
|
|
88
|
|
|
|
65
|
|
|
|
|
|
70,086
|
|
|
|
60,501
|
|
|
Less: valuation allowance
|
|
|
(66,819
|
)
|
|
|
(57,852
|
)
|
|
Total
|
|
|
3,267
|
|
|
|
2,649
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
|
(948
|
)
|
|
|
—
|
|
|
Property and equipment and software amortization
|
|
|
—
|
|
|
|
(361
|
)
|
|
Goodwill and other intangible assets
|
|
|
(2,426
|
)
|
|
|
(2,706
|
)
|
|
Other
|
|
|
(9
|
)
|
|
|
—
|
|
|
Total
|
|
|
(3,383
|
)
|
|
|
(3,067
|
)
|
|
Total deferred tax liabilities
|
|
$
|
(116
|
)
|
|
$
|
(418
|
)
|
56
At March 31, 2020, we had $199.1 million of federal net operating loss carryforwards that expire, if unused, in fiscal years 2031 to 2038, and $24.7 million of federal net operating loss carryforwards that can be carried forward indefinitely. Our Hong Kong, Malaysia, and Singapore subsidiaries have $0.4 million, $0.1 million, and $0.3 million of net operating loss carryforwards, respectively. The losses for Hong Kong, Malaysia and Singapore can be carried forward indefinitely. At March 31, 2020, our India subsidiary had $0.8 million of minimum alternative tax credits reported as other noncurrent assets on our Consolidated Balance Sheet. Our India subsidiary operates in a “Special Economic Zone (“SEZ”)”. One of the benefits associated with the SEZ is that the India subsidiary is not subject to regular India income taxes during its first 5 years of operations which includes fiscal 2018 through fiscal 2022. The India subsidiary is then subject to 50% of regular India income taxes during the second five years of operations which includes fiscal 2023 through fiscal 2027. The aggregate value of the benefit of the SEZ during the current fiscal year is $0.8 million.
At March 31, 2020 we also had $141.6 million of state net operating loss carryforwards that expire, if unused, in fiscal years 2021 through 2040.
We recorded valuation allowances related to certain deferred income tax assets due to the uncertainty of the ultimate realization of the future benefits from those assets. At March 31, 2020, the total valuation allowance against deferred tax assets of $66.8 million was comprised of $65.9 million for federal and state deferred tax assets, and $0.9 million associated with deferred tax assets in Hong Kong, Malaysia, Singapore and the Philippines. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some, or all, of the deferred tax assets will not be realized. We have recorded a valuation allowance offsetting substantially all of our deferred tax assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, we will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax code. Because of our losses in current and prior periods, management believes that it is more-likely-than-not that we will not realize the benefits of these deductible differences. The amount of the valuation allowance, however, could be reduced in the near term. The exact timing will be based on the level of profitability that we are able to achieve and our visibility into future results. Our recorded tax rate may increase in subsequent periods following a valuation release. Any valuation allowance release will not affect the amount of cash paid for income taxes.
The undistributed earnings of our foreign subsidiaries are not subject to U.S. federal and state income taxes unless such earnings are distributed in the form of dividends or otherwise to the extent of current and accumulated earnings and profits. The undistributed earnings of foreign subsidiaries are permanently reinvested and totaled $6.3 million and $3.1 million as of March 31, 2020 and 2019, respectively. We made the determination of permanent reinvestment on the basis of sufficient evidence that demonstrates we will invest the undistributed earnings overseas indefinitely for use in working capital, as well as foreign acquisitions and expansion. The determination of the amount of the unrecognized deferred U.S. income tax liability related to the undistributed earnings is not practicable.
We recorded a liability for unrecognized tax positions. The aggregate changes in the balance of our gross unrecognized tax benefits were as follows for the years ended March 31:
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Balance at April 1
|
|
$
|
580
|
|
|
$
|
687
|
|
|
$
|
988
|
|
|
Reductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to positions taken during prior year
|
|
|
—
|
|
|
|
—
|
|
|
|
(300
|
)
|
|
Relating to lapse in statute
|
|
|
(5
|
)
|
|
|
(107
|
)
|
|
|
(1
|
)
|
|
Balance at March 31
|
|
$
|
575
|
|
|
$
|
580
|
|
|
$
|
687
|
|
As of March 31, 2020, we had a liability of $0.6 million related to uncertain tax positions, the recognition of which would affect our effective income tax rate.
Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months an immaterial reduction in unrecognized tax benefits may occur as a result of the expiration of various statutes of limitations. We are consistently subject to tax audits; due to the nature of examinations in multiple jurisdictions, changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.
We recognize interest accrued on any unrecognized tax benefits as a component of income tax expense. Penalties are recognized as a component of general and administrative expenses. We recognized interest and penalty expense of less than $0.1 million for the years ended March 31, 2020, 2019 and 2018. As of March 31, 2020 and 2019, we had approximately $0.5 million and $0.5 million, respectively, of interest and penalties accrued in other non-current liabilities on our Consolidated Balance Sheets.
In the U.S. we file consolidated federal and state income tax returns where statutes of limitations generally range from three to five years. Although we have resolved examinations with the IRS through tax year ended March 31, 2010, U.S. federal tax years are open from 2006 forward due to attribute carryforwards. The statute of limitations is open from fiscal year 2013 forward in certain state jurisdictions. We also file income tax returns in international jurisdictions where statutes of limitations generally range from three to seven years. Years beginning after 2009 are open for examination by certain foreign taxing authorities.
57
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act includes provisions addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modification to the limitation placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property. Additionally, the CARES Act provides, among other provisions, for the deferral of the employer-paid portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022; the CARES Act also provides for certain employee retention tax credits.
As of March 31, 2020, these provisions are expected to provide us with approximately $0.1 million of additional liquidity during the current year due to the ability to accelerate outstanding alternative minimum tax credit refunds. Due to the net loss position of the Company, we do not anticipate impacts from net loss carryback or deductibility provisions. We are currently deferring the employer-paid portion of social security taxes but do not currently anticipate qualifying for employee retention tax credits at this time.
Separate from the CARES Act, the IRS extended the dates for estimated tax payments for the first and second calendar quarters of 2020 to July 15, 2020. Further, many states are offering similar deferrals of various classes of tax payments. Due to the net loss position of the Company, we do not anticipate material federal or state tax payment deferrals.
Significant uncertainty exists regarding the magnitude and duration of the impact of the COVID-19 pandemic; therefore, we cannot predict at this time the ultimate extent of its impact on our business operations, financial results and resulting effects to income taxes in future periods. See Part II, Item 1A. of this Annual Report for further discussion regarding risks associated with the COVID-19 pandemic.
10. Employee Benefit Plans
Defined Contribution Plans
We maintain 401(k) plans for employees located in the United States meeting certain service requirements. Generally, the plans allow eligible employees to contribute a portion of their compensation, and we match 100% of the first 1% of the employee's pre-tax contributions and 50% of the next 5% of the employee's pre-tax contributions. We may also make discretionary contributions each year for the benefit of all eligible employees under the plans. Agilysys matching contributions were $1.8 million, $1.6 million, and $1.7 million in fiscal 2020, 2019, and 2018, respectively.
We also maintain defined contribution retirement plans for employees located in the United Kingdom and in the Asia Pacific region in accordance with local statutory requirements and business practices.
Defined Benefit Plan
We maintain a defined benefit retirement plan (the “Gratuity Plan”) covering eligible employees of our India subsidiary in accordance with local statutory requirements and business practices. The Gratuity Plan provides a lump-sum payment to vested employees at retirement, death, incapacitation, or termination of employment, of an amount based on the respective employee’s salary and the tenure of employment with the Company. The Gratuity Plan is unfunded with obligation amounts recorded in the Consolidated Balance Sheets as “Employee benefit obligations” within “Other non-current liabilities.”
Endorsement Split-Dollar Life Insurance
Agilysys provides certain former executives with life insurance benefits through endorsement split-dollar life insurance arrangements. We entered into agreements with each of the former executives, whereby we must maintain the life insurance policy for a specified amount and split a portion of the policy benefits with their designated beneficiary.
Our investment in these corporate-owned life insurance policies were recorded at their cash surrender value, which approximates fair value at the balance sheet date. In the Consolidated Balance Sheets as of March 31, 2020 and 2019, the cash surrender value of $0.9 million for the remaining policies were held in “Other non-current assets,” and the present value of future proceeds owed to those executives' designated beneficiaries of $0.1 million, which approximates fair value, were recorded within "Other non-current liabilities."
Changes in the cash surrender value of these policies related to gains and losses incurred on these investments are classified within “Other (income) expenses, net” in the accompanying Consolidated Statements of Operations. We recorded a gain of $14,000, $15,000 and $17,000 in fiscal 2020, 2019, and 2018, respectively, related to the corporate-owned life insurance policies.
58
11. Commitments and Contingencies
Legal Contingencies
Agilysys is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
On April 6, 2012, Ameranth, Inc. filed a complaint against us in the U.S. District Court for the Southern District of California alleging that certain of our products infringe patents owned by Ameranth directed to configuring and transmitting hospitality menus (e.g. restaurant menus) for display on electronic devices, and synchronizing the menu content between the devices. The case against us was consolidated with similar cases brought by Ameranth against more than 30 other defendants. Most of the patents at issue in the case were invalidated by the U.S. Court of Appeals for the Federal Circuit in 2016. Cases against us and our co-defendants remained pending in the District Court with respect to one surviving Ameranth patent. In September 2018, the District Court found that patent invalid, and granted summary judgment in favor of the movant co-defendants. In early 2019, Ameranth appealed the District Court's summary judgment ruling to the U.S. Court of Appeals for the Federal Circuit. In November 2019, the U.S. Court of Appeals for the Federal Circuit affirmed the lower court’s summary judgement with respect to all claims except for two, which were not asserted against Agilysys. Shortly thereafter, Ameranth moved for a rehearing en banc, which was denied in February 2020. Finally, Ameranth filed for writ of certiorari to the United States Supreme Court. The Supreme Court has not yet responded to the writ.
We were not a party to the appeal, and it is currently unclear what impact the summary judgment ruling or writ of certiorari may have on our case. Ameranth seeks monetary damages, injunctive relief, costs and attorneys' fees from us. At this time, we are not able to predict the outcome of this lawsuit. However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.
12. Loss per Share
The following data shows the amounts used in computing loss per share and the effect on earnings and the weighted average number of shares of dilutive potential common shares.
|
|
|
Year ended March 31,
|
|
|
(In thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(34,067
|
)
|
|
$
|
(13,164
|
)
|
|
$
|
(8,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
23,233
|
|
|
|
23,037
|
|
|
|
22,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted
|
|
$
|
(1.47
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options, SSARs, restricted shares and performance shares
|
|
|
1,510
|
|
|
|
1,433
|
|
|
|
756
|
|
Basic earnings (loss) per share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares excludes 208,581, 300,437 and 334,817 of restricted shares and performance shares at March 31, 2020, 2019 and 2018, respectively, as these shares were issued but were not vested and, therefore, not considered outstanding for purposes of computing basic earnings per share at the balance sheet dates.
Diluted earnings (loss) per share includes the effect of all potentially dilutive securities on earnings per share. We have stock options, stock-settled appreciation rights ("SSARs"), unvested restricted shares and unvested performance shares that are potentially dilutive securities. When a loss is reported, the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of share-based compensation awards because doing so would be anti-dilutive. In addition, when a net loss is reported, adjusting the denominator of diluted earnings per share would also be anti-dilutive to the loss per share, even if the entity has net income after adjusting for a discontinued operation. Therefore, for all periods presented, basic weighted-average shares outstanding were used in calculating the diluted net loss per share.
59
13. Share-based Compensation
We may grant non-qualified stock options, incentive stock options, SSARs, restricted shares, and restricted share units under our shareholder-approved 2016 Stock Incentive Plan (the 2016 Plan) for up to 2.0 million common shares, plus 957,575 common shares, the number of shares that were remaining for grant under the 2011 Stock Incentive Plan (the 2011 Plan) as of the effective date of the 2016 Plan, plus the number of shares remaining for grant under the 2011 Plan that are forfeited, settled in cash, canceled or expired. The maximum aggregate number of restricted shares or restricted share units that may be granted under the 2016 Plan is 1.25 million.
We may distribute authorized but unissued shares or treasury shares to satisfy share option and appreciation right exercises or restricted share and performance share awards.
For stock options and SSARs, the exercise price must be set at least equal to the closing market price of our common shares on the date of grant. The maximum term of stock option and SSAR awards is seven years from the date of grant. Stock option and SSARs awards vest over a period established by the Compensation Committee of the Board of Directors. SSARs may be granted in conjunction with, or independently from, stock option grants. SSARs granted in connection with a stock option are exercisable only to the extent that the stock option to which it relates is exercisable and the SSARs terminate upon the termination or exercise of the related stock option grants.
Restricted shares and restricted share units, whether time-vested or performance-based, may be issued at no cost or at a purchase price that may be below their fair market value, but are subject to forfeiture and restrictions on their sale or other transfer. Performance-based awards may be conditioned upon the attainment of specified performance objectives and other conditions, restrictions, and contingencies. Restricted shares and restricted share units have the right to receive dividends, or dividend equivalents in the case of restricted share units, if any, upon vesting, subject to the same forfeiture provisions that apply to the underlying awards. Subject to certain exceptions set forth in the 2016 Plan, for awards to employees, no performance-based restricted shares or restricted share units shall be based on a restriction period of less than one year, and any time-based restricted shares or restricted share units shall have a minimum restriction period of three years.
We record compensation expense related to stock options, SSARs, restricted shares, and performance shares granted to certain employees and non-employee directors based on the fair value of the awards on the grant date. The fair value of restricted share and performance share awards is based on the closing price of our common shares on the grant date. The fair value of stock option and SSAR awards is estimated on the grant date using the Black-Scholes-Merton option pricing model, which includes assumptions regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of our common shares. During fiscal year 2020, we issued 125,000 SSAR awards which are subject to a market condition. The fair value of these awards is estimated using the Lattice option pricing model which utilizes a binary tree and includes multiple assumptions which include volatility and life of the award to determine an appropriate fair value based on the award grant date.
The following table summarizes the share-based compensation expense for options, SSARs, restricted and performance awards included in the Consolidated Statements of Operations for fiscal 2020, 2019 and 2018:
|
|
Year Ended March 31,
|
|
|
(In thousands)
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Product development
|
|
2,241
|
|
|
|
1,478
|
|
|
|
1,306
|
|
|
Sales and marketing
|
|
321
|
|
|
|
469
|
|
|
|
371
|
|
|
General and administrative
|
|
2,643
|
|
|
|
2,429
|
|
|
|
3,011
|
|
|
Total share-based compensation expense
|
|
5,205
|
|
|
|
4,376
|
|
|
|
4,688
|
|
Stock-Settled Stock Appreciation Rights
SSARs are rights granted to an employee to receive value equal to the difference in the price of our common shares on the date of the grant and on the date of exercise. This value is settled only in common shares of Agilysys.
We use a Black-Scholes-Merton or a Lattice option pricing model to estimate the fair value of SSARs. The following table summarizes the principal assumptions utilized in valuing SSARs granted in fiscal 2020, 2019 and 2018:
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Risk-free interest rate
|
|
1.38%-1.74%
|
|
|
|
2.68
|
%
|
|
1.74%-1.94%
|
|
|
Expected life (in years)
|
|
4.5-5
|
|
|
5
|
|
|
5
|
|
|
Expected volatility
|
|
31.7%-32.42%
|
|
|
|
32.42
|
%
|
|
32.42% - 32.84%
|
|
|
Weighted-average grant date fair value
|
|
$
|
10.01
|
|
|
$
|
4.72
|
|
|
$
|
3.36
|
|
60
The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury bond whose maturity period approximates the expected life of the SSARs. The expected life is estimated using historical data representing the period of time the awards are expected to be outstanding. The estimated fair value of the SSARs granted is recognized over the vesting period of the awards utilizing the graded vesting method. Under this method, the compensation cost related to unvested amounts begins to be recognized as of the grant date.
The following table summarizes the activity during fiscal 2020 for SSARs awarded under the 2016 and 2011 Plans:
|
(In thousands, except share and per share data)
|
|
Number
of Rights
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
(per right)
|
|
|
(in years)
|
|
|
|
|
|
|
Outstanding at April 1, 2019
|
|
|
1,016,643
|
|
|
$
|
11.22
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
691,364
|
|
|
|
34.72
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(37,506
|
)
|
|
|
10.02
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(15,838
|
)
|
|
|
18.09
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(9,775
|
)
|
|
|
10.61
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
1,644,888
|
|
|
$
|
21.07
|
|
|
|
4.9
|
|
|
$
|
5,236
|
|
|
Exercisable at March 31, 2020
|
|
|
959,340
|
|
|
$
|
11.79
|
|
|
|
3.9
|
|
|
$
|
5,130
|
|
|
Vested and expected to vest at March 31, 2020
|
|
|
1,644,888
|
|
|
$
|
21.07
|
|
|
|
4.9
|
|
|
$
|
5,236
|
|
The following table presents additional information related to SSARs activity during fiscal 2020, 2019 and 2018:
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Compensation expense
|
|
$
|
1,666
|
|
|
$
|
943
|
|
|
$
|
1,869
|
|
|
Total intrinsic value of SSARs exercised
|
|
$
|
519
|
|
|
$
|
907
|
|
|
$
|
88
|
|
|
Total fair value of SSARs vesting
|
|
$
|
1,328
|
|
|
$
|
1,165
|
|
|
$
|
1,325
|
|
As of March 31, 2020, total unrecognized share based compensation expense related to non-vested SSARs was $5.6 million, which is expected to be recognized over the weighted-average vesting period of 2.3 years.
A total of 21,494 shares, net of 6,712 shares withheld to cover the employee’s minimum applicable income taxes, were issued from treasury shares to settle SSARs exercised during the twelve months ended March 31, 2020. The shares withheld were returned to treasury shares.
Restricted Shares
We granted shares to certain of our Directors, executives and key employees under the 2016 and 2011 Plans, the vesting of which is service-based. The following table summarizes the activity during the twelve months ended March 31, 2020 for restricted shares awarded under the 2016 and 2011 Plans:
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
|
|
|
|
|
|
|
(per share)
|
|
|
Outstanding at April 1, 2019
|
|
|
237,146
|
|
|
$
|
13.46
|
|
|
Granted
|
|
|
223,404
|
|
|
|
22.72
|
|
|
Vested
|
|
|
(231,677
|
)
|
|
|
16.60
|
|
|
Forfeited
|
|
|
(50,411
|
)
|
|
|
17.34
|
|
|
Outstanding at March 31, 2020
|
|
|
178,462
|
|
|
$
|
19.89
|
|
The weighted-average grant date fair value of the restricted shares is determined based upon the closing price of our common shares on the grant date. During fiscal 2020, a total of 208,151 shares, net of 46,656 shares withheld from the vested restricted shares to cover the employee's minimum applicable income taxes, were issued from treasury. The shares withheld were returned to treasury shares.
61
The following table presents additional information related to restricted stock activity during fiscal years 2020, 2019, and 2018:
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Compensation expense
|
|
$
|
3,385
|
|
|
$
|
2,803
|
|
|
$
|
2,594
|
|
|
Total fair value of restricted share vesting
|
|
$
|
4,004
|
|
|
$
|
4,383
|
|
|
$
|
4,315
|
|
As of March 31, 2020, total unrecognized share based compensation expense related to non-vested restricted stock was $2.1 million, which is expected to be recognized over a weighted-average vesting period of 1.9 years. We do not include restricted stock in the calculation of earnings per share until the shares are vested.
Performance Shares
The following table summarizes the activity during fiscal 2020 for performance shares awarded under the 2016 Plan:
|
|
|
Number
of
Shares
|
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
|
|
|
|
|
|
|
(per share)
|
|
|
Outstanding at April 1, 2019
|
|
|
63,291
|
|
|
$
|
14.22
|
|
|
Granted
|
|
|
30,120
|
|
|
|
22.41
|
|
|
Vested
|
|
|
(23,526
|
)
|
|
|
22.67
|
|
|
Forfeited
|
|
|
(39,765
|
)
|
|
|
14.22
|
|
|
Outstanding at March 31, 2020
|
|
|
30,120
|
|
|
$
|
22.41
|
|
Based on the performance goals, management estimates a liability of $153,000 to be settled through the vesting of a variable number of the performance shares subsequent to March 31, 2020. As of March 31, 2020, total share based compensation expense related to performance shares has been fully recognized.
The following table presents additional information related to performance share activity during fiscal 2020, 2019 and 2018:
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Compensation expense
|
|
$
|
153
|
|
|
$
|
630
|
|
|
$
|
225
|
|
|
Total fair value of performance share vesting
|
|
$
|
513
|
|
|
$
|
243
|
|
|
|
—
|
|
Once attainment of the performance goals becomes probable, compensation expense related to performance share awards is recognized ratably over the vesting period based upon the closing market price of our common shares on the grant date.
14. Fair Value Measurements
We estimate the fair value of financial instruments using available market information and generally accepted valuation methodologies. We assess the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which pricing inputs used in measuring fair value are observable in the market. Level 1 inputs include unadjusted quoted prices for identical assets or liabilities and are the most observable. Level 2 inputs include unadjusted quoted prices for similar assets and liabilities that are either directly or indirectly observable, or other observable inputs such as interest rates, foreign currency exchange rates, commodity rates, and yield curves. Level 3 inputs are not observable in the market and include our own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the tables below.
There were no significant transfers between Levels 1, 2, and 3 during the twelve months ended March 31, 2020.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:
|
(In thousands)
|
|
31-Mar-20
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance — non-current
|
|
$
|
936
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
936
|
|
62
|
(In thousands)
|
|
31-Mar-19
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-owned life insurance — non-current
|
|
$
|
895
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
895
|
|
The recorded value of the corporate-owned life insurance policies is adjusted to the cash surrender value of the policies obtained from the third party life insurance providers, which are not observable in the market, and therefore, are classified within Level 3 of the fair value hierarchy. Changes in the cash surrender value of these policies are recorded within “Other expenses (income), net” in the Consolidated Statements of Operations.
The following table presents a summary of changes in the fair value of the corporate-owned life insurance Level 3 asset for the fiscal years ended March 31, 2020 and 2019:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
(In thousands)
|
|
2020
|
|
|
2019
|
|
|
Corporate-owned life insurance:
|
|
|
|
|
|
|
|
|
|
Balance on April 1
|
|
$
|
895
|
|
|
$
|
853
|
|
|
Unrealized gain relating to instruments held at reporting date
|
|
|
14
|
|
|
|
15
|
|
|
Purchases, sales, issuances and settlements, net
|
|
|
27
|
|
|
|
27
|
|
|
Balance on March 31
|
|
$
|
936
|
|
|
$
|
895
|
|
15. Quarterly Results (Unaudited)
Because quarterly reporting of per share data is used independently for each reporting period, the sum of per share amounts for the four quarters in the fiscal year will not necessarily equal annual per share amounts. GAAP prohibits retroactive adjustment of quarterly per share amounts so that the sum of those amounts equals amounts for the full year.
Occasionally, the timing of large one-time orders, such as those associated with significant remarketed product sales around large customer refresh cycles or significant volume rollouts, creates variability in our quarterly results.
|
|
|
Year ended March 31, 2020
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
(In thousands except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
Net revenue
|
|
$
|
38,389
|
|
|
$
|
40,722
|
|
|
$
|
41,987
|
|
|
$
|
39,659
|
|
|
$
|
160,757
|
|
|
Gross profit
|
|
|
20,014
|
|
|
|
20,217
|
|
|
|
21,064
|
|
|
|
19,657
|
|
|
|
80,952
|
|
|
Restructuring, severance and other charges
|
|
|
231
|
|
|
|
190
|
|
|
|
11
|
|
|
|
150
|
|
|
|
582
|
|
|
Legal settlements, net
|
|
|
—
|
|
|
|
(125
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(125
|
)
|
|
Net loss
|
|
$
|
(1,575
|
)
|
|
$
|
(2,918
|
)
|
|
$
|
(2,582
|
)
|
|
$
|
(26,992
|
)
|
|
$
|
(34,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss Per share data-basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(1.47
|
)
|
|
|
|
Year ended March 31, 2019
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
(In thousands except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
Net revenue
|
|
$
|
34,007
|
|
|
$
|
34,203
|
|
|
$
|
36,014
|
|
|
$
|
36,618
|
|
|
$
|
140,842
|
|
|
Gross profit
|
|
|
17,889
|
|
|
|
17,749
|
|
|
|
18,647
|
|
|
|
19,595
|
|
|
|
73,880
|
|
|
Restructuring, severance and other charges
|
|
|
440
|
|
|
|
448
|
|
|
|
58
|
|
|
|
222
|
|
|
|
1,168
|
|
|
Legal settlements
|
|
|
91
|
|
|
|
35
|
|
|
|
—
|
|
|
|
15
|
|
|
|
141
|
|
|
Net loss
|
|
$
|
(1,736
|
)
|
|
$
|
(3,791
|
)
|
|
$
|
(4,048
|
)
|
|
$
|
(3,589
|
)
|
|
$
|
(13,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss Per share data-basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.57
|
)
|
63
16. Subsequent Events
COVID-19 has had a significant impact on our business as of and subsequent to our March 31, 2020 fiscal year-end as the travel and hospitality industries including our customers’ businesses suffered an abrupt and steep decline in activity due to property closures, cancelled voyages, cancelled sporting and entertainment events, and many other business operations curtailments. The change in the business environment for our customers resulted in project delays for our professional service teams, our inability to deliver products to closed property locations and a general reduction in sales activity.
We have taken actions to mitigate the impact on our business. During the first quarter of our fiscal 2021, we have reduced discretionary costs, implemented a hiring freeze on non-essential positions and reduced payroll and related costs through layoffs, employee furloughs, employee retirement benefit limitations, and salary decreases for executive team members and certain other employees of the Company.
The extent COVID-19 will impact our business including operations and financial results cannot be reasonably estimated at this time. Many factors will continue to influence the COVID-19 pandemic’s impact on us including its ultimate severity, future government actions in response to COVID-19, and how quickly and to what extent economic conditions return to levels before COVID-19.
In May 2020, the Company announced a $35 million investment from MAK Capital One, LLC (“MAK Capital”), a leading investment management firm who has been a major shareholder of the Company since 2007. MAK Capital will purchase $35 million of convertible preferred stock carrying a 5.25% dividend that will be convertible into shares of the Company’s common stock at a price of $20.1676 per share. The transaction is subject to customary closing conditions and is anticipated to finalize during May 2020. The close of the transaction will add $35 million in preferred stock to the Company’s balance sheet and increase our cash balance by the $35 million investment less estimated closing costs of approximately $1 million.
17. Related Party Transaction
See Note 16. Subsequent Events, for description of the MAK Capital investment in the Company announced in May 2020. Michael Kaufman, the Chairman of the Company’s Board of Directors, is the Chief Executive Officer of MAK Capital.
Schedule II - Valuation and Qualifying Accounts Years ended March 31, 2020, 2019 and 2018